Moving Your Investments to an SEP IRA Rollover Account

Posted by bobrichards on May 1st, 2010

If you’re in the process of performing an SEP IRA rollover, you’ll probably find yourself feeling confused during at least one part of the rollover process. Don’t worry – SEP IRA rollovers can be confusing, given all of the various options and SEP IRA rollover plans that are currently on the market. A little information on how to move your investments using this type of rollover should help clear up most of your questions.

For starters, be aware that “SEP IRA” is short for Simplified Employer Pension Plans, and that they are retirement plans that are specifically geared toward those people who are self-employed or own their own businesses. With this type of account, you’re allowed make contributions into your account (and even the accounts of your employees) up to a certain amount each year, tax free.

The SEP IRA contribution amount, however, does not apply to the rollover amount if you choose to transfer your funds from a traditional IRA. These funds can be moved in a single transaction when you complete a SEP IRA rollover and, if they’re done in a direct transfer, you won’t have to worry about paying taxes on any rolled over funds. If you don’t complete a direct SEP IRA rollover, then a standard minimum 20% fee will be withheld so that taxes can be paid if you do not deposit the funds into the SEP IRA within a sixty day period (known as an indirect rollover).

You may consider leaving your current retirement funds where they are currently, but the truth is that if you’re eligible for an SEP IRA, you’ll want to take full advantage of the benefits associated with this kind of retirement savings plan. The reason for this is that traditional IRA accounts have a yearly contribution cap of $5,000. SEP IRA contributions amounts, on the other hand, are significantly different – in fact, you’re allowed to contribute up to 25% of your yearly income (up to a maximum of $49,000) to the account, tax free. For those people who are self employed, this can add up to a significant contribution for their retirement savings.

On the other hand, if you have an established Roth IRA, then it may not be feasible for you to transfer your funds into an SEP IRA. The reason for this is that you’ve already paid taxes on the Roth IRA amount, and if you transfer them into an SEP IRA, you could potentially have to pay taxes on the money again when it’s withdrawn. This would be counterproductive to your original investment and probably not something that will benefit you in the long run. If this is the case for you, you’d probably want to leave the funds that you already have in the Roth IRA there and set up a separate SEP IRA account instead.

If you’re looking to transfer your funds into an SEP IRA rollover account, you’ll need to make sure that you have the new account set up first so that you can complete a direct rollover and avoid the need for any tax money to be withheld. It may be difficult to understand all of the SEP IRA rollover rules and regulations, so if you have any concerns, contact your financial advisor or tax consultant for further information.